Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the first 6 weeks of the fourth quarter we observed increased volatility and small-cap stocks underperformed the market. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards The Cato Corporation (NYSE:CATO) to find out whether it was one of their high conviction long-term ideas.
The Cato Corporation (NYSE:CATO) was in 19 hedge funds' portfolios at the end of September. CATO investors should pay attention to an increase in support from the world's most elite money managers of late. There were 16 hedge funds in our database with CATO positions at the end of the previous quarter. Our calculations also showed that cato isn't among the 30 most popular stocks among hedge funds.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 18 percentage points since May 2014 through December 3, 2018 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
[caption id="attachment_30621" align="aligncenter" width="487"] Cliff Asness of AQR Capital Management[/caption]
Let's go over the fresh hedge fund action regarding The Cato Corporation (NYSE:CATO).
What have hedge funds been doing with The Cato Corporation (NYSE:CATO)?
At the end of the third quarter, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of 19% from the second quarter of 2018. By comparison, 12 hedge funds held shares or bullish call options in CATO heading into this year. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Citadel Investment Group held the most valuable stake in The Cato Corporation (NYSE:CATO), which was worth $8.9 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $8.6 million worth of shares. Moreover, GLG Partners, D E Shaw, and Royce & Associates were also bullish on The Cato Corporation (NYSE:CATO), allocating a large percentage of their portfolios to this stock.
As one would reasonably expect, key hedge funds have jumped into The Cato Corporation (NYSE:CATO) headfirst. Renaissance Technologies, managed by Jim Simons, assembled the largest position in The Cato Corporation (NYSE:CATO). Renaissance Technologies had $2.3 million invested in the company at the end of the quarter. David Costen Haley's HBK Investments also made a $1.1 million investment in the stock during the quarter. The other funds with brand new CATO positions are Thomas Bailard's Bailard Inc and Matthew Hulsizer's PEAK6 Capital Management.
Let's check out hedge fund activity in other stocks similar to The Cato Corporation (NYSE:CATO). These stocks are Spartan Motors Inc (NASDAQ:SPAR), Alpine Global Premier Properties Fund (NYSE:AWP), Eaton Vance Senior Floating-Rate Fund (NYSE:EFR), and Daseke, Inc. (NASDAQ:DSKE). This group of stocks' market valuations resemble CATO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SPAR,13,41380,-3 AWP,1,788,0 EFR,2,915,1 DSKE,12,32183,-3 Average,7,18817,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $19 million. That figure was $44 million in CATO's case. Spartan Motors Inc (NASDAQ:SPAR) is the most popular stock in this table. On the other hand Alpine Global Premier Properties Fund (NYSE:AWP) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks The Cato Corporation (NYSE:CATO) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.
Disclosure: None. This article was originally published at Insider Monkey.